It’s always important in any investment to be “choosy,” which is to say you want to try and be in the best of breed in whatever group you play in. MLPS are no exception to this and based on some recent developments, caution may be in order.
Tops are processes rather than events and it seems that we are in a top-building process here as far as the MLP index is concerned. For the quarter, MLPs were basically flat versus the S&P 500, which was up a whopping 12 percent, and the Nasdaq, which was up 18 percent. During the last two weeks, however, there has been one group of MLPs that has taken it on the chin very hard. Coal-related MLPs have been in free fall ever since the EPA came out with a ruling last week, which will severely limit any new coal fired plants. This has sent some MLPs straight down. The biggest of these is Alliance Resource Partners (ARLP), which reached the low $80s right at the beginning of January but is trading down around $57 today. Clearly, investors are seeing this development as a very real roadblock to future distribution growth. And in the end, that is what owning an MLP is all about. If you can’t grow the payout, you can’t grow the stock price.
No doubt the chart looks ugly and the break under $60 takes out the October 2011 low, which is not a good sign. Unless you’re a falling knife catcher, my opinion (no guarantees) is to look elsewhere. For those of you who have to be in MLPs, it would be wise now to perhaps gravitate to the best in the group that have no coal exposure. Penn Virginia Resources (PVR) is another coal MLP that has taken it on the chin recently as the chart below indicates. The stock was up near $28 but has now fallen down to near $20. This is another falling knife candidate.
A third coal MLP to avoid is Natural Resource Partners (NRP), which is another one with a rather ugly chart, although the move here from $29 to $24 is not quite as extreme as Alliance Resource from a point perspective, but all three here have moved down 25% off their highs. Penn Virginia and Natural Resource are still sitting above their October 2011 lows.
Going forward in a few weeks, we will hear from these companies. If they can’t grow the payout then these stock prices will be under pressure particularly if the interest rate side of this equation decides to become a serious headwind.